No one wants to see their investments lose value, and when that happens, it’s easy to feel discouraged. But there is a positive side with tax-smart financial planning. Investment losses can potentially become tax benefits through tax-loss harvesting. Harvesting investment losses is a strategic end-of-year exercise to identify and sell assets that have performed below their purchase price.
What is Tax-Loss Harvesting?
The difference between the amount you initially paid for the asset and the sale price is applied against future capital gains to help lower your tax bill. Up to $3,000 can be applied annually to offset ordinary income (such as wages) with any additional amount carried over to subsequent years.
The Wash Sale Rule
The IRS has implemented the “Wash Sale” rule to prevent selling an investment at a loss and immediately repurchasing. It states that clients who sell a stock and plan to use losses to offset taxes cannot repurchase the same stock within 30 days before or after the repurchase.
Is There Such a Thing as Tax-Gain Harvesting?
Absolutely. Tax-gain harvesting can also be useful in managing tax liabilities, but with this approach, you intentionally sell investments with significant gains. The key here is timing. By selling when your tax bracket is lower than what you anticipate in the future, you may be able to realize tax savings over the long run and potentially lower your Modified Adjusted Gross Income in subsequent years if your tax bracket is likely to be higher.
In this scenario, clients can even repurchase the same investment after the sale because Wash Sale rules don’t apply when a profit is made from the sale.
Putting Tax-Saving Strategies into Action
Applying tax-loss harvesting appropriately can be complex – that’s when it’s important to have strong tax knowledge at your fingertips. When you partner with Wymer Brownlee Wealth Strategies, you’ll have the benefit of comprehensive wealth management through a tax-focused lens that can be applied across most of the financial decisions you’ll make in your lifetime — including investing, retirement spending, social security planning and transferring wealth.
Ready to Get Started?
Tax-Loss Harvesting
- Best when markets are down or when you need to rebalance your portfolio
- Apply losses to offset future capital gains
- Sell investments at a loss
Tax-Gain Investing
- Reduce future Modified Adjusted Gross Income (MAGI) and liabilities when in higher tax bracket
- Sell most profitable investments while in lower tax bracket
Contact us today with your questions about how tax-loss or tax-gain harvesting strategies can help you maximize your returns and reduce taxes.
Blog by Stephen O’Neill, Senior Wealth Advisor & Shareholder
Category: Tax and Accounting Team
